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Leveraged Loans: Is High Leverage Risk Priced in?

Author

Listed:
  • David Newton

    (University of Bath - School of Management)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

  • Ru Xie

    (University of Bath, School of management)

  • Binru Zhao

    (University of Bath - School of Management)

Abstract
The economic downturn caused by the Covid-19 pandemic accentuates extant concerns about the leveraged loan market. Using a novel dataset, we show that leveraged loan spreads have declined for nonbank-facilities since the introduction of the Interagency Guidance on Leveraged Lending (IGLL) and the ensuing “frequently asked questions for implementing the March 2013 guidance”. The decline in leveraged loan spreads is significant for highly leveraged borrowers, especially when involving term loans. We further demonstrate that risk shifting issues associated with the high level of Collateralized Loan Obligations issuance strongly explain the decline of nonbank leveraged loan spreads. In addition, a higher degree of information asymmetry, driven by an increase in covenant-lite loan issuance and weaker investor protection, are strongly associated with the narrowed leverage risk premium.

Suggested Citation

  • David Newton & Steven Ongena & Ru Xie & Binru Zhao, 2020. "Leveraged Loans: Is High Leverage Risk Priced in?," Swiss Finance Institute Research Paper Series 20-111, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp20111
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3741693
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    Citations

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    Cited by:

    1. repec:zbw:bofitp:2022_005 is not listed on IDEAS
    2. David Newton & Steven Ongena & Ru Xie & Binru Zhao, 2022. "Banks vs. Markets: Are Banks More Effective in Facilitating Sustainability?," Swiss Finance Institute Research Paper Series 22-22, Swiss Finance Institute.
    3. David Newton & Steven Ongena & Ru Xie & Binru Zhao, 2022. "Banks vs. Markets: Are Banks More Effective in Facilitating Sustainability?," Swiss Finance Institute Research Paper Series 22-22, Swiss Finance Institute.
    4. De Novellis, G. & Musile Tanzi, P. & Stanghellini, E., 2024. "Covenant-lite agreement and credit risk: A key relationship in the leveraged loan market," Research in International Business and Finance, Elsevier, vol. 70(PB).

    More about this item

    Keywords

    Leverage Risk; Syndicated Loan Pricing; Leveraged Loan; Risk Shifting;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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